Question

18 Rooney Corporation operates three investment centers. The following financial statements apply to the investment center named Bowman Division: Skipped BOWMAN DIVISION Income Statement For the Year Ended December 31, 2018 Sales revenue $106,580 Cost of goods sold 59,975 Gross margin 46,605 Operating expenses Selling expenses (2,710) Depreciation expense (4,175) Operating income 39,720 Nonoperating item Loss of sale of land (3,500) Net income $ 36,220 BOWMAN DIVISION Balance Sheet As of December 31, 2018 Assets Cash Accounts receivable Merchandise inventory Equipment less accumulated depreciation Nonoperating assets Total assets Liabilities Accounts payable Notes payable Stockholders' equity Common stock Retained earnings Total liabilities and stockholder's equity $ 12,552 40,366 37,700 90,268 9,300 $190,186 $ 9,597 64,000 76,000 40,589 $190, 186 Required c. Calculate the ROI for Bowman. d. Rooney has a desired ROI of 12 percent. Headquarters has $95,000 of funds to assign to its investment centers. The manager of the Bowman Division has an opportunity to invest the funds at an ROI of 14 percent. The other two divisions have investment opportunities that yield only 13 percent. Calculate the new ROI for Bowman division, if the investment opportunity is adopted by Bowman. e. Based on the original data, calculate the original residual income. Also, calculate the new residual income based on information provided in Requirement d. Complete this question by entering your answers in the tabs below.

Answer 1

Bowman Division

c. ROI=Operating Income / Operating Asset

=39720/180886=21.96%

*Operating Asset= 190186-9300=180886

d. Computation of New ROI

Revised Income = Existing Income +New Income

39720+ 95000*14%=53020

Revised operating Asset= Original Asset+ Additional Asset

180886+95000==275886

ROI= 53020/275886=19.22%

e.Original Residual income

Income - Desired return on Asset

39720-(180886*12%)=$18014

e.Revised Residual income

Income - Desired return on Asset

53020-(275886*12%)=$19914